As expected, the Federal Open Market Committee (FOMC), announced a faster pace of balance sheet tapering. At the November FOMC meeting, the Fed announced the start of tapering at a pace of $15 billion per month; but only for November and December. At the conclusion of today’s meeting, the Fed announced it would double the pace to $30 billion per month—$20 billion of Treasury securities and $10 billion per month of mortgage-backed securities (MBS). That means tapering will conclude in March 2022; at which point the Fed will no longer be adding to its balance sheet.
The December FOMC meeting is one of the four at which new Summary of Economic Projections and “dot plot” are published along with the FOMC statement (see below). Those now show that Fed officials now expect three 25 basis points increases in the fed funds rate next year—moving up off the zero bound, where the rate has been since March 2020. The FOMC’s median projection for inflation in 2022 was revised up from 2.2% in September, to 2.6% today; and it now projects the unemployment rate will be 3.5% by the end of 2022, down from the 3.8% projection in September.
Source: Charles Schwab, Federal Reserve, as of 9/22/2021. Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are percent changes from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant’s projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The projections for the federal funds rate are the value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run. 1For each period, the median is the middle projection when the projections are arranged from lowest to highest. When the number of projections is even, the median is the average of the two middle projections. 2Longer-run projections for core PCE inflation are not collected.
The decision represents a significant shift from September’s forecasts, when the FOMC was evenly split on the need for any rate hikes in 2022. The new projections also show an additional three rate hikes as appropriate in 2023, with two more in 2024—bringing the fed funds rate to 2.1% by the end of 2024.
Although most initial reactions from Fed watchers used the “hawkish” label to describe today’s decision, the dot plot leans more dovish for 2023. Current market pricing suggests investors (as of now) believe that more rate hikes sooner could mean the hiking cycle ends earlier than originally thought.